Philip II returns to France.

The Sustainable Debts of Philip II

10.23943/princeton/9780691151496.003.0005 ◽

2017 ◽

Author(s):

Mauricio Drelichman ◽

Hans-Joachim Voth

Keyword(s):

Sixteenth Century ◽

Strong Evidence ◽

Military Expenditure ◽

Debt Service ◽

Fiscal Sustainability ◽

Short Term ◽

Systematic Analysis ◽

Philip Ii ◽

Long Run

This chapter addresses the sustainability of debt. A systematic analysis based on the International Monetary Fund's (IMF) methodology to evaluate fiscal sustainability shows that Castile was able to service its debts in the long run. While liquidity was scarce during periods of intense warfare, years of relative peace brought large surpluses. The data collected from Castile's annual fiscal accounts produced new yearly series of revenue, military expenditure, short-term debt issues, and short-term debt service. The resulting database spans a full 31-year period—enough to employ modern quantitative techniques. This analysis provides strong evidence that Castile's fiscal position in the second half of the sixteenth century was on a solid footing. The chapter then assesses whether the events that led to major downturns in Castile's financial fortunes could have been anticipated.

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Lending to the Borrower from Hell

10.23943/princeton/9780691151496.001.0001 ◽

2017 ◽

Cited By ~ 1

Author(s):

Mauricio Drelichman ◽

Hans-Joachim Voth

Keyword(s):

United States ◽

Sixteenth Century ◽

Sovereign Debt ◽

Risk Sharing ◽

The United States ◽

Philip Ii ◽

Loan Contracts ◽

The Right ◽

Intelligent Model ◽

New Evidence

Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. This book looks at one famous case—the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, the book analyzes the lessons from this historical example. Using detailed new evidence collected from sixteenth-century archives, the book examines the incentives and returns of lenders. It provides powerful evidence that in the right situations, lenders not only survive despite defaults—they thrive. It also demonstrates that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The book unearths unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, this book offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults.

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